The Pawn Isolated: Valeant, Philidor and the Annals of Fraud

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The Southern Investigative Reporting Foundation’s story looking at Valeant Pharmaceuticals’ well-concealed relationship with Philidor Rx Services, struck a nerve.

Briefly, the story explored the ways in which Philidor, a specialty pharmacy whose sole customer is Valeant, used opacity and some misdirection to try and build a national pharmacy network. Additionally, the Southern Investigative Reporting Foundation uncovered how Valeant had sought to conceal its control of Philidor.

A Valeant conference call scheduled for Monday morning, Oct. 26 is designed to explain these previously hidden relationships and, more importantly, calm the very frayed nerves of its battered shareholders.

But recently uncovered documents from a litigation between Philidor and R&O Pharmacy are probably going to have the opposite effect, in that they illuminate what can only be described as a bizarre effort to circumvent California regulations. Moreover, R&O’s allegations have been known to Valeant management for a month.

Additional Southern Investigative Reporting Foundation reporting has revealed that Valeant has been closely involved with Philidor at every stage of its life cycle, controlling it in all but name, since day one.

This pain isn’t being borne for no reason, however.  The foundation’s reporting indicates that Philidor is almost certainly one of the most important parts of Valeant’s business.

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On July 21 Russell Reitz, a 64-year-old pharmacist and the “R” in R & O Pharmacy, was working in his office when a visitor dropped in unannounced. It was Eric Rice, an executive with Isolani, the company that had struck, what he thought, was a deal to buy the small compounding pharmacy back in December.

Rice had flown in from Philadelphia with several of the ranking executives of Philidor Rx Services. This Reitz found odd since when he questioned Rice about it, he insisted he worked for Isolani.

It was a tense but professional meeting and both sides left it unfulfilled.

Eric Rice was unable to come to an agreement over securing $3 million in payments he felt were due his enterprise. Reitz, for his part, had a startlingly basic question that Rice had not satisfactorily answered, both in a series of emails, and in person.

Reitz wanted to clear up once and for all, why despite his insistence that he worked for Isolani, he was always professionally connected to someone from Philidor. What was the difference between the two companies, or were they one and the same?

Rice’s colleagues, Philidor CEO Andy Davenport, general counsel Gretchen Wisehart and controller Jamie Fleming, were to Reitz’s eyes, in the middle of everything Isolani did.

Rice, whose Screen Shot 2015-10-25 at 10.03.17 PM

A brief aside: organic growth, or the increase in sales apart from Valeant’s acquisitions of other companies, is vital to the debate over its future. Short sellers and other critics, for example, have argued that the company’s drug brands are, in the main, declining; without the torrid pace of acquisitions, shrinking revenues and profits are a foregone conclusion.

Thus the importance of looking at what Philidor’s newly exposed captive pharmaceutical network reveals. Here’s what it shows: In the second quarter, Valeant’s 8-K reported “organic” sales growth of 19 percent, with revenue growing $691 million, to $2.73 billion from $2.04 billion.

Of this $691 million, however, at least $392 million was attributable to acquisitions, with the $299 million balance organic revenue.

The Kaufman declaration’s release of the Philidor/Valeant invoices to R&O imply a prospective quarterly sales run rate of about $55 million (an average $4.6 million weekly shipment multiplied by 12 weeks). This would have accounted for 18.5 percent of Valeant’s total organic growth in the second quarter. From there, it’s a sure bet that given the prominence of West Wilshire to Philidor’s billing unit, its sales volume would easily surpass R&O.

Notionally, organic growth equal to 40 percent or more of that $299 million could have come from two pharmacies that even the most gimlet-eyed Valeant sleuth didn’t suspect existed.

It also becomes much easier to understand why Valeant’s management didn’t immediately sever the relationship with Philidor.

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An outside spokeswoman for Valeant, Renee Soto of Sard Verbinen, told the Southern Investigative Reporting Foundation last week the company would not comment.

A message left for Gary Tanner was not returned.

And attempts to contact Eric Rice and other Philidor employees named in the story by placing calls to the company’s management ended up with their being routed to Greg Blaszczynski, the chief financial officer of BQ6 Media. That’s the pharmaceutical marketing effort where both Davenport brothers have served as CEO.

8 thoughts on “The Pawn Isolated: Valeant, Philidor and the Annals of Fraud

  1. This is good reporting.

    If I could make a suggestion, it would be to include two legal charts with a few boxes and (unfortunately a lot of) lines showing relationships between those boxes, including intercompany loans, shareholdings, and the option Valeant has to buy Philidor for $0– this would give a view on the ownership / capital structure. Another chart with those same entities but different lines (or arrows) connecting them showing sales and purchases, would be very interesting…. If that’s too far out of the ordinary for this sort of thing, I am sure readers can do this on their own, though there would be a net work savings if just done once. If I missed said charts in the article (in a link?), apologies.

    Valeant’s behavior seems to at least be ‘pushing the envelope’ of what is considered legal and / or acceptable in the US.

  2. There’s another more basic question regarding Philidor that seems to be glossed over or ignored: How plausible is it that these two Davenport characters seemingly come out of nowhere and start a company that in less than two years has a value of at least $133mm, and potentially up to $233mm? They don’t seem to have any background in pharmaceuticals or any credible knowledge of drug distribution, and this type of business isn’t exactly known to offer potential for such rapid wealth creation. This value creation would be remarkable even by the standards of Silicon Valley. Take a look at the video of the interview by the Pennsylvania Senator of Andy Davenport. Does he strike you as the CEO/entrepreneur of a multi-hundred million dollar enterprise? And Mr. Pearson says he doesn’t know the owners of a business he’s buying, or buying an option on, or even how many owners there are? There are far too many oddities with the distributor ownership, secrecy, legal questions, personnel, etc., for this to be fully on the up and up. VRX needs to disclose exactly where the $133mm went- who owns Philidor; who got the money; exactly how did they arrive at the option/earn-out price?; are the sellers putting the proceeds into the business?; do they have management contracts?; exactly how are the option payments flowing through VRX’s books? Best guess? the $133mm was used to buy VRX product.

  3. Mike Pearson claims he didn’t know the owners of Philidor.

    Elizabeth Kardos and David Cowen are listed as owners of a Philidor entity in North Carolina.
    As someone posted on Bronte Capital, Kardos and Cowen live in New Vernon, NJ — a very small, very wealthy community in NJ where Mike Pearson also happens to live.

    http://www.nytimes.com/1999/04/11/style/weddings-elizabeth-kardos-and-david-cowen.html

    a little background on the “members” of the LLC, Kardos and Cowen of 56 Anthony Wayne Rd, New Vernon, NJ

  4. The brothers have zero clue in the Pharma industry I know them. All I can say is now they are very Wealthy with nice cars, new homes ect.

    We all know nothing will happen to them and they got away with it.

    Lady M $$$$$

  5. why was Matt Davenport not arrested but his brother was, rumor on the street he is spending money like crazy just look at his new house WOW!!

    The question is did Andy his brother take the fall and have Matt heading the money in his huge new mansion or in his new restaurant.

  6. Why was Matt Davenport not ARRESTED but his brother ANDY was? The rumor on the street he is spending money like crazy just look at his new house WOW!!

    The question is did Andy his brother take the fall and have Matt hiding the money in his huge New Mansion or in his New Restaurant.

  7. Why was Matt Davenport not ARRESTED but his brother ANDY was? The rumor on the street he is spending money like crazy just look at his new house WOW!!

    The question is did Andy his brother take the fall and have Matt hiding the money in his huge New Mansion or in his New Restaurant.

    Oh Look, LOL
    Matthew Davenport | LinkedIn
    https://www.linkedin.com/in/matthew-davenport-a5785341
    Greater Philadelphia Area – ‎Chief Innovation Officer, BQ6 Media Group – ‎BQ6 Media Group, LLC
    View Matthew Davenport’s professional profile on LinkedIn. LinkedIn is the … Executive Vice President and General Counsel at Philidor Rx Services, LLC …

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